A new online investment service promises to provide all consumers with low-cost expert investment portfolio management. Known as robo advisers, digital advisers and online advisers, these groups offer fully automated, low-cost, low-touch, algorithm-driven professional portfolio management.
For years, the financial services industry made all of the rules when it came to investing. If consumers wanted to assess their financial situations, determine appropriate investments, or buy and sell securities, they had to work with a financial professional. In the late 1990s, advancing technology opened the financial floodgates, and everything changed. For the first time, without the involvement of a financial adviser, consumers could easily access company information, the industry's best investment research and trade securities economically. For some consumers, it was the answer they were looking for. Suddenly they had all of the necessary information at their fingertips; they could save money and choose not to share their intimate financial information with anyone.
When it comes to investing, individuals who do it themselves are a unique breed. Some are very knowledgeable; some are confident enough to make their own investment decisions; some are thrifty; and some are too arrogant to ask for help. But the do-it-yourself approach doesn't work for everyone, and the majority of consumers feel more secure when working with a knowledgeable industry professional.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Do robo advisers offer the best of both worlds?
According to the firms offering these automated services, in today's world expert investment guidance and competitive investment performance are commodities. They do not require human intervention, can be delegated to a computer and cost much less than a financial adviser. The process is simple: A consumer begins by filling out an online questionnaire that asks questions about their goals, financial situation and experience.
Once that's finished, the firm's computer does the work of matching the individual's investment resources, goals and risk tolerance to one of its model portfolios. If the consumer likes what she or he sees, the money is transferred, the investments are made on behalf of the individual, and the portfolio is managed.
At last, these investment management firms suggest, consumers have a way to get expert portfolio management without having to choose between doing it themselves or hiring a financial adviser. Who could ask for anything more?
As it turns out, most of us.
Why financial advisers are critical
There's no question that low-touch portfolio management will work for some, but for the vast majority of consumers, hiring a financial adviser still makes sense because:
1. Financial advisers do much more than manage investment portfolios.
Unlike the "investment brokers" of the past who only bought and sold stocks and bonds, today's financial advisers provide a broad array of services, including goal setting, financial planning, insurance planning, investment planning, estate planning and legacy planning. Online money managers focus solely on managing investment portfolios, which makes their work somewhat one-dimensional.
2. Investing is grounded in science, but at its best, investing is an art.
Gathering economic, market and investment-related information and data; determining an investor's resources; gauging risk tolerance and computing cash flow needs are variables that influence investment decisions, but they do not represent the entire investment process. The best investment plans integrate the scientific, data-driven strategy with the artistic flair that the financial adviser has developed from his or her years of experience, knowledge of what it takes to achieve goals and understanding of human beings, their motivation and emotions.
3. By definition, advice requires opinion and counsel.
Advice is defined as "an opinion about what could or should be done about a situation or problem; counsel."
While market and investment opinions are readily available from a variety of sources—such as the media, the Internet, well-meaning relatives and all-knowing friends at a cocktail party—counsel is formal guidance that is delivered by a human being, not a computer. Computers are wonderful, but no computer on Earth can do what financial advisers do best: protect their clients from themselves and their emotions by calming them when life transitions throw them off-course and managing their anxiety during market downturns.
Many think of investing as a purely intellectual exercise. Intellectually, the case for investing in financial assets makes perfect sense. Our intellect, the rational mind, understands that over the long-term, investors have been rewarded for investing in stocks and bonds, staying the course and remaining invested for 10, 20 or 30 years.
Unfortunately, when markets are volatile and news is gloomy, that intellectual exercise becomes an intestinal challenge. When money is at stake, human beings become emotional and anxious. Emotions and anxiety trigger our most primitive instinct of "fight or flight," and when that happens, we make decisions that are not in our best interest, such as selling investments into declining markets.
Consumers benefit most when they form a relationship with and receive human counsel from a financial adviser. Despite what the robo advisers say, there is never one answer, never one size that fits all. When the dust settles, it's likely that investors will reap the rewards of technological advances in portfolio management by working with experienced financial advisers who use algorithm-driven portfolio management tools to benefit their clients.
Related Content
-
The New JetBlue Premier Card Is Packed With Perks – But Is It Worth the Annual Fee?Travelers can now apply for the JetBlue Premier Card, the airline’s new elite card packed with perks. Find out how it compares to other, more affordable JetBlue cards.
-
Retirement Income Planning for Unfunded Health Care CostsRetirement income plans often don't include late-in-life health or long-term care expenses. Here's how to cover for the unplanned withdrawals to pay for those.
-
Retirement Income Planning for Unfunded Health Care Costs
Retirement income plans often don't include late-in-life health or long-term care expenses. Here's how to cover for the unplanned withdrawals to pay for those.
-
Federal Employees Buyout Offer: Five Things to ConsiderFederal workers have a constellation of retirement benefits, and assessing them can get complicated fast. Here are five high-stakes decisions to focus on.
-
Insurance Bad Faith After Natural Disasters: What to KnowUnderstanding the basics of insurance claims after catastrophic losses is important, especially if you encounter insurance bad faith. Here's what to do if that happens.
-
Five Reasons Not to Give Your Child Power of AttorneyWhen drawing up powers of attorney, older parents will most likely name adult children as their representatives. But is that always the smart choice?
-
What the Great Wealth Transfer Means for Financial AdvisersClients depend on their financial advisers to encourage them to tackle estate planning and guide them through complex strategies and potential family disputes.
-
Investment Management: A Return to SimplicityHere's how financial professionals can find the sweet spot between using sophisticated investment strategies and creating more simplicity for their clients.
-
Build Your Dream Retirement With These Five StepsDreaming about life after work? Turn your dreams into a concrete, actionable plan by nailing down the why, what and how of your retirement.
-
For Investors, 2024 Was a Year to RememberA perfect storm of favorable conditions created a rewarding landscape for investors. A buzz of cautious optimism continues for 2025.
